GCC: Positive outlook despite oil price dip

Kuwait, May 21, 2013

The fall in oil prices to below $100 per barrel over the past few weeks has triggered some concerns over the potential impact on the Gulf region’s economy.

Brent crude prices fell by some 19 per cent from their peak of $119 in February to a low of $96 in mid-April – the first spell below $100 since last July, said a study by the National Bank of Kuwait (NBK).

The decline was particularly sharp in the first half of April, when prices were undermined by poor news on the global economy and generally weak sentiment.

Prices have since bounced back slightly from these lows, reaching $104 in early May partly in reaction to the cut in interest rates from the European Central Bank. But they remain well off their highs. Futures market prices have also fallen, pricing in a more pessimistic medium-term view than before. The Brent December 2013 contract recently traded at $103 compared to $111 in mid-February.

However, NBK says that the latest fall does not alter the main narrative of a region set for solid economic growth over the next couple of years.

“We had long expected oil prices to weaken in 2013 from last year’s average of $112, as the soft outlook for global oil demand combines with rising supplies (including from the US, Iraq and Libya) to loosen market fundamentals. The recent fall merely moves prices more or less into line with our expectations for this year,” said Daniel Kaye, head of macroeconomic research at NBK.

Indeed, despite the more pessimistic view in the futures market, it is still too early in the year to say that prices will remain at this level throughout. Temporary factors may have contributed to recent declines.

Oil markets often loosen around this time of the year as seasonal factors – including moderate temperatures and refinery maintenance – reduce the demand for crude. This could reverse as we head into the summer. Moreover, geopolitical tensions relating to Iran and North Korea have eased of late, but could yet re-emerge.

GCC fiscal position still solid at $100 oil

But even if prices remain close to current levels (or fall slightly lower), there is no need for the region’s growth dynamic to fundamentally change. The latest fall in oil prices may have cost around $60 billion (4 per cent of GDP) in lost budget revenues for the region as a whole over the course of a year.

But this income would have been mostly saved rather than spent, so its loss has limited direct impact on business activity; what matters for demand in the economy is the amount of their income that governments actually spend, noted Kaye.

Moreover, even at $100 oil, the region’s financial position looks fairly robust. Estimated fiscal breakeven oil prices for 2013 generally lie in the $70-100 range, and for most countries, they are toward the lower end of that range.

“In aggregate, the region is likely to see a large budget surplus of around 8 per cent of GDP this year. The combination of fiscal surpluses and large existing financial reserves suggests that governments will have little problem financing their medium-term development plans, which remain central to the region’s current growth story,” explained Kaye.

A more durable outlook?

“Of course, despite large financial resources, GCC countries would not be immune from a serious global economic downturn should one occur. Indeed, large reserves did not prevent the global crisis of 2008 having a major impact on the region,” said Kaye.

“GCC non-oil GDP growth slowed to just 3 per cent per year in 2009 and 2010 (on average) from 10 per cent in the previous three years, as oil prices, asset markets, trade levels and business confidence all weakened sharply. Without the spectacular growth of gas-fuelled Qatar, the impact would have been greater still.”

But in many ways, growth in the region’s economy now looks more durable than before. This is partly because growth now is more subdued than in the pre-crisis days; a shock to the system would be less severe.

Other vulnerabilities such as elevated asset prices, extraordinary growth in credit, and heightened real estate speculation have also been purged. And in the current post-Arab Spring environment, governments with financial resources are likely to remain committed to spending measures that support living standards for nationals, as well as medium-term development projects.

However, economic growth over the next couple of years is still likely to outperform that in many other parts of the world (and indeed the rest of Mena), some of which will remain bogged down by financial austerity and structural issues.

“We continue to look for growth in the GCC non-oil sector of a solid-looking 5 per cent in both 2013 and 2014,” Kaye concluded. – TradeArabia News Service